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Universal Headed for Spinoff?

2 Jul, 2002 By: Staff Reporter

For Universal staffers and other Hollywood observers, the big questions resulting from the news Monday that Jean-Marie Messier appears to be on his way out as chairman and CEO of Vivendi Universal were whether Vivendi Uni's entertainment assets would be spun off into a separate entity and whether it would include Universal Music Group.

Amid the turmoil in the Vivendi Uni board room in Paris, speculation was rampant in Hollywood and on Wall Street that Barry Diller, who became chairman and CEO of Vivendi Universal Entertainment in December with the $10 billion merger of Vivendi Uni and his USA Networks Inc., would eventually take the reins of a splintered company comprising Vivendi Uni's movie, TV and theme park businesses. Diller was unavailable for comment Monday.

Diller currently does not have oversight of the industry-leading UMG, so it was unclear how the music assets might figure into any Vivendi Uni breakup strategy. Indeed, sources in Hollywood and Paris cautioned that any talk of a Vivendi Uni spinoff plan was premature at best.

Nonetheless, there was instant speculation that Diller would recruit a group of strategic investors -- namely U.S. media and investment concerns -- to help him acquire outright the entertainment assets he now oversees. Sources close to Diller said there was little chance he would move to recombine the Vivendi Uni assets with USA Interactive, the e-commerce and new-media company that Diller carved out of the old USA Networks Inc. after selling the USA and Sci Fi Channel cable networks and other film and TV assets to Vivendi Uni.

Such a combination would likely face skeptical capital markets now that the business model of combining old and new media has fallen decidedly out of fashion. Sources said Diller would likely insist on maintaining the status quo that allows him to serve as CEO of two separate companies as a condition of any spinoff takeover.

"Universal has the management in place to run the company day to day," SG Cowen entertainment analyst Peter Mirsky said. "I wouldn't rule out that Diller takes an expanded role in the strategy of (Vivendi Uni Entertainment), but most of his compensation is coming from USA Interactive. ... While his ego may be with Hollywood, his passion is with interactivity."

Veterans of Universal and Diller's USA -- which was built on the foundation of TV assets Diller acquired from Universal in 1997 -- were nonplused by the latest drama playing out among their corporate masters. Senior Vivendi Uni Entertainment executives were alerted via e-mail Sunday morning that the Messier news would break Monday.

"No matter where this company ends up, it's pretty clear that Barry's going to be running it," a senior Uni television executive said. "Everything that's been going on in Paris has been a pretty interesting soap opera to watch, but it doesn't really hit our day-to-day business."

Meanwhile, UMG insiders hailed Messier's departure as a victory for Edgar Bronfman Jr., the former Seagram Co. chief who beefed up the music group with the acquisition of PolyGram Holdings in late 1998 before Seagram sold Universal to Vivendi in late 2000. Many felt that Bronfman was forced to step down as executive vice chairman of Vivendi Universal last year because of a power struggle with Messier.

UMG's leadership holds Bronfman in high esteem, as building up UMG was Bronfman's primary focus when Seagram acquired the company. Under his and UMG chairman Doug Morris' tutelage, UMG became the world's largest music company, currently holding a U.S. market share of about 28 percent.

– Cynthia Littleton and Nicole Sperling; Tamara Conniff contributed to this report.

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